You can NOT positive cash flow on a 2 family in Rhode Island!!!

[Matt Romano]

That is, while house hacking.  At least in the areas that I've been searching for multis. Excuse the controversial subject title, but, I needed this post to stand out a bit :)  So....

I've been searching for a property to house hack over the past few months. My criteria has been a multifamily, under $300k, in the Bristol / Warren area of RI.  (but was open to close surrounding towns, like East Providence, Portsmouth and Tiverton). I viewed a 2 family today in Warren that seems like a prime candidate, and I would love for you fellow BP pros to chime in with your thoughts.  First and foremost, relating back to my title, I've come to the conclusion that its really not likely in this area, in this market, to purchase a 2 family and cash flow positively WHILE owner occupying. A 3 family typically can be much closer to doing so, (but still may only break even after all expenses), whilst the 4 units can almost always indefinitely make you (some) money while you live.  However, the 4 unit properties are out of my price range in the areas I'm looking, and I'm not looking to sacrifice to a lower income area just because the numbers might seems more favorable. So I will start from here, which I'm ok with!

The property is listed for $240,000, and its a 3 bed 1 bath on the first floor and a 1/1 on the second unit (upstairs where I would occupy). Current Rents are $1150 downstairs, $675 upstairs, and property has a 3 car garage in which 2 bays rent for $125/mo. So total gross income is $1950 (in terms of investment property), or $1275 (minusing the 675 while I occupy the small upstairs unit). I would do conventional financing and put 20% in to avoid PMI, and borrow $192k. Mortgage payment would be between $1300-$1400/mo (depending on true tax and insurance numbers). Owner is responsible for gas as its not separately metered, and water. Electric however IS separate. SO I need to keep those expenses in mind. I've run the numbers in the rental property calculator here, and it's not a HUGE money maker in terms of cash flow, honestly its quite minimal. And could even dip negative if there were property management (wouldn't do anytime soon, just perspectively speaking) A few reasons why I really think this is an awesome opportunity despite the numbers not being anything impressive.

1. It's so close to my current residence, legit could run there in 4 mins, or bike in 2. And its a great location.  

2. The property is seems very well maintained. Had a roof done 4 years ago.  New windows throughout, new vinyl siding (including the garage), new water heater, landscaping is very well kept.  And you can even tell that the current tenants (downstairs specifically) really take care of it and treat it like a home to them. 

3. There's definitely room for forced appreciation if bathrooms were remodeled and minor kitchen updates. So definitely potential for higher rents

4. I need to make a move and start my real estate career!!!

Anyway, this post is already super long.  Basically just wanted to hear the thoughts of anyone whose willing to chime in! I'm seeing another 3 family tomorrow in Bristol, so I'll have another property to compare it too, but I have a really good feeling about this one. 

PS: maybe a topic for a different day, YOUR thoughts on putting 20% down and being in a much more advantageous position in terms of equity, VS putting as low down as possible (like FHA) but having a much great ROI.

[Anthony Thompson]

@Matt Romano Your analysis is probably quite correct. No one who's "house hacking" should expect to live for free (what I think you're calling cash flow) in most cases, especially with a 2 family and especially in nicer areas (higher acquisition cost).

As you've noticed, it's harder for a 2-family to cash flow than a 3- or 4-family, and I think that's largely due to the fact that you're still mostly competing with (bidding up the price on) owner occupants instead of investors.

Most owner occupants don't "run the numbers" and are mostly buying for personal use, because they like the area, etc., and look at the other unit as a little help with the mortgage payment.

With 3- and 4-unit properties however, most owner occupants aren't willing to deal with the increased headaches of them so you find per-unit prices much more reasonable from an investment point of view because that's the main pool of buyers, investors.

(By headaches, I mean that 1) fire coding is more onerous for 3- and especially 4-families and 2) the "tenant mentality" is tougher for 3- and 4-families, much more of a "not my property not my problem" mentality, more conflicts between tenants/units, etc.)

Also it's harder in general (even for 3- and 4-families) in nicer areas for investment properties to cash flow, because the properties are lower risk, and the tenant selection is much better, so investors are willing to pay more and get a lower return.

The real advantage of house hacking (occupying one of the units in an investment property) is getting favorable, 30-year fixed rate owner-occupied financing, which is the best you can do. And some minor tax benefits as well. If you move out in a few years to house hack another property, you'll still have those benefits and they'll definitely help the first property toward cash flowing better.

The question of "bigger down payment on fewer properties, or lower down payment on more properties" comes up frequently on Bigger Pockets so I'd recommend searching for similar posts and seeing what comes up.

In general, for newer investors my recommendation is that because "you don't know what you don't know" (i.e., this is mostly all new), that you put a larger down payment on one/fewer properties to give yourself a safe buffer for learning, for the market to turn against you, for expenses you didn't anticipate, etc. Once you feel comfortable you can always change strategies on future properties, but personally I consider higher leverage more of a riskier/advanced strategy.

Good luck and let us know how your hunt goes of course!